Monthly Archives: October 2008

Where did this whole subprime crisis that has tripped up the world economy start? There are a number of reasons why lenders became more aggressive in lending to those less qualified and why people who could not afford home payments bought houses anyway. Both come down to bad judgment and greed. The following article in the New York Times breaks the story in 1999 and together with the American Enterprise Institute they point out that if there are problems with these loans, the American taxpayer will foot the bill.

Any time lenders or borrowers make bad decisions in credit worthiness, they should pay a price. Unfortunately, in this case, the shrinking percentage of Americans who pay income taxes will bail out both sides and pay for the hangover from a party that most didn’t attend, and that’s not right.

The old adage "When the United States sneezes the world catches a cold" is proving to be true once again, as foreign markets have suffered from much worse declines than the United States this year. We believe that the policy actions of the Treasury and Federal Reserve will begin to cure the financial crisis in the United States. However, we are not so optimistic on the measures being taken outside of this country to treat the symptoms of the crisis, much less provide the cure. The economists of Europe lack the tools and resources to address the crisis effectively, and Asian economies are suffering from slowing export growth driving those economies deeper into recession. We continue to recommend underweighting foreign developed and emerging markets.

As we wait for indications that the bottoming process is working through, we had another bad week.The Dow fell 473 points over the week ended last Friday, more than erasing the 401 point gain the prior week.And international equity markets started out this week badly, with Hong Kong’s Hang Seng equity index down 12.6%, Japan’s NIKKEI 225 index down 6.4%, the FTSE index down 1.7% and so on.Emerging Markets have really been hammered, especially equity markets in countries that have a heavy reliance on energy, materials, or precious metals production and sales. In Brazil, for example, the Bovespa stock index fell 6.5% and is down 64% in dollar terms so far this year.

Equity markets around the world continue to experience high volatility as investors deal with a great deal of uncertainty about just about everything.Although we still face a long list of unanswered questions, volatile markets, and yes, a recession, some of the right answers are starting to come in.

The ongoing list of unknowns is daunting: Are we in a global recession?How deep will it be?Are government and central bank actions sufficient to deal with the banking crisis?Is OPEC likely to stick us with an oil production cut in an attempt to push oil prices back up again?And so on. Yuck.

The election calendar, seasonality, and history of bear markets all point to an October bottom for the stock market. In election years, October often marks the start of the rally after a volatile first three quarters of the year. Since the start of the S&P 500 in the 1920’s, the fourth quarter of a Presidential election year has always posted a gain with only two exceptions, 2000 and 1932. Often called the "bear killer" by market historians, more than half of the declines associated with recessions and bear markets since WWII ended in the month of October. The market plunge in September and October was dramatic, and it became deeply oversold on a technical basis and very undervalued on a fundamental basis; however, the market needs a trigger to unlock these conditions and begin a really.

Volatility remained in vogue last week as equity markets endured one of the most down-and-up weeks on record. With the acute phase of the financial crisis/credit crunch now largely in the rear view mirror, financial markets last week abruptly refocused on the ramifications of the crisis on corporate earnings and the economy.

Investors generally didn’t like what they saw in last week’s batch of economic data, as they tried to discern the breadth and depth of the recession. The big shocker (for financial market participants, at least) came with the release of the September retail sales data, which showed a sharp 1.2% decline in spending between August and September. This data marked the third consecutive monthly decline in retail sales, the first time since the 1990-91 recession that retail sales have declined in three consecutive months.

On Tuesday and Wednesday we gave up much of the ground we gained on the Monday rally in U.S. equity markets.Then today, after being up and down, U.S. equity markets closed higher, with the Dow up 401 points.This high volatility reflects a whole host of concerns.Markets are worried about whether the government rescue plan will work, how deep the recession will be, a continued “freeze” in interbank lending, arcane but very serious issues involving “credit default swaps”, concerns that hedge funds may blow up, and on and on.On the other hand, I think many stocks are looking cheap, attracting buyers.I expect markets will remain volatile for some time. I hope we have seen the low but, of course, have no way to know.

Global financial markets have experienced historic turmoil in the past few days in the wake of the Lehman Brothers bank­ruptcy, the sale of Merrill Lynch and the heightened liquidity concerns over AIG that led to that insurer being taken over by the U.S. government. In this update, PIMCO Co-CIOs Bill Gross and Mohamed El-Erian outline PIMCO’s view about how this “disorderly redefinition of the U.S. financial landscape” is likely to affect investors.

Last week was awful, bad enough to push governments around the world into action against the underlying drivers of the financial panic that caused global financial markets to just plain crash. And today we’re seeing the markets around the world respond to these government efforts with sizable rebounds.

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